Why has the Fed created incentives for US corporations to loot their companies and drive them deeper into debt?

- Advertisement -

Despite four consecutive quarters of negative earnings, weak demand and anemic sales, US corporations continue to load up on debt, buy back their own shares and hand out cash to their shareholders that greatly exceeds the amount of profits they are currently taking in. According to the Wall Street Journal: "SandP 500 companies through the first two quarters of the year collectively returned 112% of their earnings through buybacks and dividends."

You read that right, US corporations are presently giving back more than they are taking in, which is the moral equivalent of devouring one's offspring.

These companies have all but abandoned the traditional practice of recycling earnings into factories, productivity or research and development. Instead, they're engaged in a protracted liquidation process where the creditworthiness of their companies is used to borrow as much money as possible from the bond market which is then divvied up among insatiable CEOs and their shareholders. This destructive behavior can be traced back to the perennial low rates and easy money that the Fed has created to enhance capital accumulation during a period when the economy is still mired in stagnation. The widening chasm that has emerged between the uber-wealthy and everyone else since the end of the financial crisis in 2008, attests to the fact that the Fed's plan has succeeded beyond anyone's wildest imagination. The rich continue to get richer while the middle class drowns in an ocean of red ink. This is from CNBC:

- Advertisement -

"Corporate debt is projected to swell over the next several years, thanks to cheap money from global central banks, according to a report Wednesday that warns of a potential crisis from all that new, borrowed cash floating around.

"By 2020, business debt likely will climb to $75 trillion from its current $51 trillion level, according to SandP Global Ratings. Under normal conditions, that wouldn't be a major problem so long as credit quality stays high, interest rates and inflation remain low, and there are economic growth persists.

"However...should interest rates rise and economic conditions worsen, corporate America could be facing a major problem as it seeks to manage that debt. Rolling over bonds would become more difficult should inflation gain and rates raise, while a slowing economy would worsen business conditions and make paying off the debt more difficult. ...

"'Central banks remain in thrall to the idea that credit-fueled growth is healthy for the global economy,' SandP said. 'In fact, our research highlights that monetary policy easing has thus far contributed to increased financial risk, with the growth of corporate borrowing far outpacing that of the global economy.'" (Corporate debt seen ballooning to $75 trillion: SandP says, CNBC)

Well, if the risks are so great, then why is the Fed encouraging the bad behavior by perpetuating its low rates and super accommodative monetary policies?

Could it be that the Fed is not really the "independent" institution its proponents claim it to be, but the policymaking arm of the big Wall Street investment banks and the mega-corporations that arbitrarily impose the policies that best serve their own profit-making ambitions?

- Advertisement -

It sure looks that way to me, after all, how many jobs were actually created by the Fed's $3 trillion in QE?

How about zero. In contrast, stock prices have more than tripled during the same period increasing the net-worth of US plutocrats by many orders of magnitude. Bottom line: Fed policy has been a windfall for the moocher class, but a bust for everyone else.

But there are risks associated with the Fed's trickle up policies. For example, check out this blurb from an article in last week's Wall Street Journal on dividends:

"The data highlight the stampede into dividend-paying stocks in response to the plunge of interest rates in recent years. Many investors now are supplementing slumping fixed-income payouts with high-yielding shares, a strategy that some analysts warn could expose buyers to the risk of large capital losses that could wipe out years of income.